D.J. Alexander - Estate Agents & Property Managers

Renting is as good a measure of economic confidence as buying

24/10/2009

This statistic has implications for the wider business community. Indeed, anyone looking for a fairly accurate measure of the pulse rate of the economy could do worse than study the residential rental market.

During the summer, a lower than average cost of new residential property leases suggested that, in Edinburgh and Glasgow at least, rental rates had fallen. In fact, the real reason was because the greater number of properties let to new tenants during June, July and August were at the smaller end of the market (i.e. one-bedroom, or compact two-bedroom, flats).

Further investigation shows a wider picture portrayed by these statistics. Basically, more new lets this summer involved smaller properties because so many leases held on larger properties were being renewed, rather than given up, by their existing occupiers. This was a sure sign of one of the most salient repercussions of the mortgage famine – young singles and married couples unable to get on the first rung of the ladder of home ownership.

Even a proportion of young people who have been granted a mortgage ‘approval’ by one of the banks or building societies are still reluctant, or at least neutral, about buying property at the moment. Popular opinion has it that first-time buyers (obviously with no concerns about selling) are biding their time in the hope that house prices will fall further. This is probably true in some cases but I suspect a wider, more tangible, reason. Younger homeowners have, traditionally, looked to manageable house price inflation to help them move onward and upwards within the owner-occupier market. A sizeable surplus on their first sale gave them sufficient equity to trade up to a larger property, which they anticipated would increase in value at a greater and faster level than the first purchase. And so it went on, literally, over succeeding years until their children matured and fled the nest and the couple began to think about downsizing.

However with house prices static – and even, some believe, potentially in line for a further round of deflation – young people will be less encouraged to buy if they face the prospect of nil or negative equity several years from now.

By remaining in rented accommodation – a market that is overwhelmingly ‘furnished’ – fewer young people are buying new carpets, sofas, refrigerators and other household goods than would have been the case had they gone on to owner-occupation in the normal scheme of things. Thus this financially enforced extension of property renting has negative repercussions for the High Street and for retail parks.

Up to now I have concentrated on the middle end of the rental market – but the performance of prime properties also gives a clue to the level of wider economic activity. Until the autumn of 2007 executive housing in areas like Edinburgh’s West End and the Park area of Glasgow was much in demand from firms seeking accommodation for company directors posted to Central Scotland from elsewhere in the UK or overseas.

Now this movement of people – one of the main symptoms of a buoyant economy, is just not there, or at least not to the extent that it was two years ago. The corporate-led demand for this type of accommodation has to a great extent dried up and those companies who are still seeking this type of property on behalf of senior staff know they can drive a hard bargain on rents.

Therefore, the rental market is confirming something else that many of us suspected – that the downturn in executive postings is a sign of an economy still greatly under-performing.

The more optimistic economists are still predicting a turnaround in the fortunes of the economy early next year while, at the other extreme, some believe that the level of public and private debt in Britain is such that it may take until 2015 to get back to where we were in the middle of 2007. A change of government is unlikely to alter opinions. Historically, business confidence is usually given a boost when a Labour Prime Minister is replaced by a Conservative one, but this time the national deficit is so deep that whoever wins power, the business community will likely have to bite on the same bullet as everyone else.

So, by all means continue to keep an ear open for what economists have to say but it may be appropriate to also keep an eye on the residential rental market – as a weather vane it might just be one of the best economic barometers around.

David Alexander is proprietor of the Edinburgh- and Glasgow-based rental and estate agency firm, D J Alexander.

THE SCOTSMAN, 24 October 2009

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